China’s Yuan May Be Best Asian Carry Trade

A gauge of the yuan’s risks and rewards shows it is the most attractive carry trade in Asia, spurring demand for Dim Sum bonds as exports (CNFREXPY) rebound.

The yuan’s Sharpe ratio, which measures returns adjusted for price swings, was 8.6 percent so far in the second half, compared with 3.9 percent for Thailand’s baht and 0.1 percent for India’s rupee. China’s ratio is second only to Argentina’s 25 percent among emerging markets. Yuan notes sold in Hong Kong completed a 21st straight week of gains, returning 2.3 percent since March 28, a FTSE Group and Bank of China Ltd. index shows.

Manufacturing in July rose at the fastest pace since April 2012 and exports drove a record trade surplus as Premier Li Keqiang cut small-business taxes and bank reserve ratios. The yuan gained 0.9 percent this quarter, paring 2014’s loss to 1.5 percent. Options traders are the most bullish on the yuan in eight months as the central bank signals it will tolerate gains.

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